The focus will now be on the capital markets & the economy in longer
trm perspective...I have wanted to do this for a long while and have
wearied of outlining near term perspectives...Short term opinion has
become an overcrowded field...

About Me

Retired chief investment officer and former NYSE firm
partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader,
and CIO who has superb track
record with multi $billion
equities and fixed income
portfolios. Advanced degrees,
CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms:
CAVEAT EMPTOR IN SPADES !!!

Tuesday, June 30, 2009

Gold went out today around $927 0z. It failed to hold the strongrally uptrend from 11/08 into 02/09, and now it is close to afurther breakdown on a more extended uptrend measured from11/08 with an intermediate "touch" of the line around mid- April' 09. This is a charitable read since the lengthier uptrend has yetto fully confirm by taking out the Feb. high. Failure of gold torally over the next 5 trading days could set the metal up for adeeper correction down to the $800 level. Time to pay a littlemore attention.

The gold macro directional indicator has moved steadily higher in2009 on expanded monetary liquidity, a rising oil price and a strongrally in industrial commodities. But the indicator has also leveledoff over the past 2 weeks and its trend, like that of gold, is about tobe tested, especially as oil has flattened out and turned a littlewobbly around $70 bl.

Since gold led the rally back into riskier assets off its 11/08 low,it's worth watching shorter term from a broader perspective.

Wednesday, June 24, 2009

The FOMC finished up today. They left policy unchanged andcommented that the recession and price deflation are easing andthat sustained inflation is not in sight. they are relying on a tool --the "Gap Chart" -- a tool that has been a cornerstone of monetarypolicy for longer than most of you have lived. The chart comparesthe trend of production and capacity and measures whether the gapis growing or retreating. A growing gap means capacity is advancingfaster than production, which means the operating rate for theeconomy is receding and that so should inflation pressure. The gapis huge now, with the operating rate at a low 68% and still falling.So, for now, the Fed sees no reason to expect a sustainable riseof inflation pressure.

They have been dead wrong on this since late winter. Inflationpressure -- measured without seasonal adjustment -- has been onthe rise even as the production / capacity "gap" has openedwider. The FOMC did not acknowledge this fact today and hasopted to project that continued US and global economic slack willkill off inflation pressure from rising commodities prices in theweeks and months ahead.

Commodities players have an accomodative monetary policy attheir backs and are also armed with the knowledge that since therecession in new order rates has been unwinding rapidly, pricesshould improve with needed inventory restocking. When theeconomy does come off deep recession, commodities can bouncesharply on inventory pipeline refilling, only to settle back asplayers realize that underlying demand, although set to recover,must rise from very low levels. That is the Bernanke bet for thetime being. If commodities players, which now include the bighedgies and long only funds, can keep the markets stoked, theFed will fall well behind the curve.

Commodities do exhibit a slight bias toward seasonal weaknessover the second half of the year, but not nearly enough to rescuethe bet. That will require a round or two of profit taking bythe speculators who have had the markets in play.

Tuesday, June 23, 2009

12 Month DeflationThe CPI measured yr/yr showed deflation of 1.3% through May, andthe yr/yr CPI for June and July could well give deflation readings of2.5%. No surprises here, and no surprise that the 2.5% deflationmark may reflect the bottom on pricing pressure for 2009.

Inflation PotentialThe inflation gauges I use appear to have made bottoms here in Half1 '09. The CPI remains sensitive to the direction of commoditiesprices, especially fuels. With a positive monetary liquidity cycleunderway and low short term interest rates, traders have beenrunning up the petrol sector and commodities broadly as they looktoward economic recovery. Right now we appear on track to see areversal of direction in the yr/yr CPI toward inflation on the order ofup to 2.5% by year's end 2009. Commodites are volatile indeed andthe current uptrends are running ahead of the economy. Whetherthe action in the trading pits can sustain the direction of commoditiesover the course of the year remains an open question. It will beinteresting to see if the Fed's FOMC addresses this issue in its6/24 statement and at upcoming meetings.

Friday, June 19, 2009

A broad variety of longer term indicators shows that the market hasturned up from one of its weakest periods in history. The oneexception is the Wilder ADX indicator, which has yet to flash a buyoutside of 20 weeks. It has signalled a change in the direction ofthe trend to positive, but is moving very slowly toward a full scalebuy. Several indicators, and I have looked at over 10, show thatpositive price momentum off the early Mar. '09 low has been verystrong, too strong perhaps for the longer term.

The SP 500 is also nearing a very important downtrend line thatextends from the May, '08 rally and catches the Aug. '08 interimhigh. This line down is significant because the market rapidly fellapart into a crash shortly thereafter. So this will be a big test oftrend out ahead. The market is now well through and past the crashdown lines.

The SP 500 13 wk. m/a is rising and is threatening to pop abovethe 40 wk m/a. Some technicians call this eventuality a "goldencross" which is seen as providing a confirmation of a durableadvance (providing the 40 wk m/a soon turns up, too). CHART.

Measured on a 40 wk. price oscillator, the market is but rathermildly overbought. But, when I go out one derivative and look atthat oscillator against a 13 wk. average of itself, I see anextremely overbought market. Here again, the momentum hasbeen uncharacteristically strong, even for the onset of a cyclicalbull market. To be to the point, the trajectory of this advanceis nearly twice normal, which suggests that at some point out therein time, there will be a sharp price correction or extended periodof range bound consolidation or both. In short, when viewed longterm, we are contending with a price rocket.

Now, because the SP 500 took out its 2002-03 lows during thecrash late 2008 - early 2009, we not only ended a long term bullmarket, but we have entered a bear market of indeterminatelength. We can see powerful cyclical advances during such a periodand we do not have to plunge to even fresher lows at some point.But we have to recognize the possibility.

From a short term perspective, resolution of the price rocketissue is not necessarily a worry. We could see a moderatecorrection and a tradable rally in the interim. However, lookingout a month or more, resolution of the price rocket saga couldbecome more pressing.

Thursday, June 18, 2009

Measures which coincide with the level of economic activity showedthat the US economy declined for the 12th consecutive monththrough May 2009. Measured yr/yr, the two sets of indicators Iuse were down about 6.5%. The big declines are in retail sales andproduction which were down 11.1% and 13.4% respectively. Thelone positive has been the real wage which is up 4.4% yr/yr.Inventories were still likeley being run off through May, andproductivity -- by any sensible measure -- is down as output hasbeen falling more sharply than employment and hours worked.

My profits indicators for nonfinancials show yr/yr weakness. Thisreflects both lower sales and profit margins in the US as well asabroad. Net revenues for financials have been holding up, butloan and securities losses likely continue large.

A broad array of indicators suggest that the US economy may hitbottom in July '09. A very rough guess at this point suggests theeconomy could be up by 2.5% by year's end or early 2010.

Viewed historically, consumer spending should already be runningmuch stronger given the very large yr/yr growth of the real wage.Householders are obviously continuing to build a savings cushionand trim their debt. This development should keep everyonehoping for recovery edgy.

With output down sharply yr/yr, the velocity or turn over of moneyhas fallen, providing excess liquidity relative to the real needs of theeconomy. This is quite a development given that my broad measureof financial liquidity is running flat yr/yr. Traditionally, excessliquidity of this sort provides a strong tailwind for the stock market,although this is not always the case.

I am watching the production data carefully. It has been badlypunished not only by the downturns in autos, other durables andhousing, but by a large decline in export sales as well. Should therebe further significant weakness in production, I would be willingto call this downturn an economic depression given how far theproduction composite has fallen below trend and how long it willtake to recover to new high levels.

Wednesday, June 17, 2009

Ultimately, you cannot legislate away the pernicious effects ofstupidity and greed and their profound influence on the stabilityof the financial markets and systems. The US and other economiesare littered with past financial crises, most of which could have beenavoided by prudent foresight and courageous action. But, every sooften, emotion like greed and fear combine with ignorance andoutright stupidity to overwhelm the system.

We could all benefit greatly from a more stable monetary policy andless monetary tinkering. Consumers would all benefit if they hadexposure to finance, banking and economics in their student days,and regulators could benefit greatly from keen and diligentgathering of financial and market intelligence so that they at leastknow what we could be getting ourselves into during headyfinancial times.

However, investors and lenders who do not do their homeworkthoroughly and maintain sensible disciplines will avoid gettingburned in the markets only if they are lucky. Caveat Emptor!

Tuesday, June 16, 2009

Back on 6/2, with the SP500 at 945, I mentioned in a post that Ithought the market was due for a correction. After failing to breakout top side last week, the market has headed down so far thisweek, and some technical damage is evident. The SP500 hasfallen through its 10 and 25 day m/a's, and both of the m/a's inquestion have turned down. Moreover, the ADX tool showsthat +D1 has just fallen below a rising -D1 on declining momentum.Note though that the 10 day m/a has yet to confirm a downtrendby falling through the 25 day m/a CHART.

I know full well how short term technicals can whipsaw you, butI think enough of this type of analysis to say the amber light is on.

IF a correction is finally underway, my best guess now is that if theSP500, now 911, is contained in a range of 865 - 880, then it wouldremain plausible to argue that the powerful bull leg in evidencesince Mar. '09 could well run further before it confronts moresubstantive headwinds. IF there is a break below 865, then theargument for a cyclical bull from a technical perspective becomesmore problematic, although not necessarily fatally flawed.

With the downdraft this week, the market has turned ever soslightly oversold, and I plan to keep an eagle eye on it, which Ihave not done for a few weeks. It might also be wise to look atsome of the longer term issues in an upcoming post to comeshortly.

Thursday, June 11, 2009

On balance US financial system liquidity has changed little since earlyin the year. My broad measure of credit driven liquidity remainsflattish as further contraction of the commercial paper market andshadow banking system are offset by rising personal and businesssavings via money markets and CDs. The Fed has drawn authorityto increase its balance sheet by nearly $1 tril. more, but has not usedit. In fact, Fed bank credit has contracted since the 2008 holidayseason.

Banking system equity capital has increased by 9.5% yr/yr, asTARP money and new offerings by larger banks have dwarfedminiscule internal growth for the system. Liquidity is still tightat the margin as C&I loans remain in the early stage of a cyclicalrun-off. Total loan exposure remains flat, which is not atypical ina major economic downturn.

On a global basis, the breadth of new manufacturing orders hasincreased sharply in 2009, with the US and China leading the way.There have been numerous reports that China is stocking basicmaterials, including bunker crude. With some inventory speculationunderway, petro prices have jumped as have commodities, as tradersget on the recovery anticipation bandwagon. The CPI in the US,excluding seasonal adjustment, has been rising this year so far. TheFed has maintained a ZIRP policy and has fallen behind the seasonalincrease of inflation. Basic economic benchmarks for Fed policy aregiving readings well below what would normally trigger rate increasesas the economy has yet to move into an expansion phase. Thecontinuation of a ZIRP with commodities on the upswing has probablycontributed somewhat to a steepening yield curve and a weaker USdollar.

The Fed would prefer not to jeopardize the now fabled "green shoots"with tighter monetary policy, and probably does not now mind aweaker $. However, persistence of fuel and commodities price risesover the remainder of 2009 would put the Fed well behind the curve,as inflation pressures would increase.

Ideally the Fed would like to wait for economic recovery to take hold.With short rates near zero, the central bank would have ample leewayto move rates toward more normal levels as the economy expands aswell as contract a Its very large balance sheet.

For the moment however, it is in a less comfortable position than itwas just a few months back, and it will be interesting to see how itbalances the prospects for the economy against higher materialsprices at its upcoming FOMC meeting, Jun. 23-24.

Tuesday, June 09, 2009

The bond is sharply oversold and advisory sentiment -- usuallywrong at key turning points -- has dropped into the upperreaches of "too many bears" territory. The bond price is hoveringjust above important support. Conditions continue to fall intoplace for what could be a sharp counter-trend rally.

The long Treasury remains very sensitive to the trend of industrialcommodities prices, which are in a clear uptrend now. So, what isneeded now is a spot of negative news on economic recoveryprospects to shake the industrials market into a round of profittaking. That would serve to rally the T-bond.

Friday, June 05, 2009

The availability of commodities ETFs and long position mutual fundscoupled with a large bull market in commodities from 2001 - 2008has lead to a substantial increase of interest in this area and hasre-positioned commodities from consummables to an asset class.

Over the long term, commodities have been a poor investment. Thefamed CRB composite has appreciated by just 2.5% per annum since1970. Commodities prices have tended to move in 6 year cycles, butthere have been 2 longer term bull markets in recent years: 1970 -1980, and 2001 - 2008. There are pundits out there who maintainthat a long term or secular bull market is in place, but such claimssorely test credulity. However, a multi year bull run in commoditiesas occured over 2001 -2008 can be highly profitable for an investorwith rigorous discipline.

History shows commodities are most sensitive to interest rates andthe liquidity cycle. Now with short rates low around the world and anew liquidity cycle underway to reflect easier monetary policy,commodities have been moving up since Feb. '09, with this moveaided by a positive bounce in the leading economic indicators.

Since 1980, most advances in the CRB index, which closed today at258, have been constrained in a range of 260 - 280. Breaks above thatlevel in 1979 and again in 2003, heralded sharp advances. So themarket is approaching important resistance, and with this test thoughtnear even before the global economy breaks into expansion, you canappreciate the enthusiasm of commodites bulls as they anticipateeconomic growth with the added fillip of inventory rebuilding.

I will do more on commodities going forward. Relative to the longterm trend of the CPI, commodities are indeed cheap as a class.Below, I have linked to the CRB index chart. I would put resistancein two close together spots -- 260 / 280 and again at 300. I wouldalso point out that commodities are crash prone when evidence of atough credit crunch emerges, as happened in 1980 and again in 2008.

The weekly and monthly leading indicators continue to move upsharply, signaling that the US economy is setting up to recoverfrom deep recession. The indicators have surged from verydepressed levels, so it remains a little foggy to tell just howimminent expansion may be. The Economic Power Index remainspositive but the index is being carried entirely by lower taxwitholding rates, unemployment insurance and the large increasein Social Security payout. The real wage remains strong, but thecontinued deterioration of employment has flattend the USpayroll pretax. Straight ahead, there will be pressure in DC tomake sure the spending stimulus dollars are being pumped out. Thevery large inventory liquidation underway since late 2008 putsthe economy in a position to benefit from pipeline refilling as finaldemand continues to stabilize. Continuing constraints to growth inthe short term remain strong private sector liquidity preference andthe large inventory of unsold homes ( A measure of pending homesales is showing recovery.)

Capital slack continues to increase and is quite large withemployment, capacity utilization and business credit demand at lowlevels. The Obama spending program has been designed to take upsome of this slack. If private sector interest in building liquid assetsup does not ease off some with improved confidence, then TeamObama may look to enlarge the scope of fiscal stimulus.

No shortage of issues and worries here, but the indicators arepointing northward, which what is needed most.

On a global basis, total output and new orders measures continue torecover from exceptinally low levels registered around the end of2008. these measures are a little more than half way to expansionreadings.

Tuesday, June 02, 2009

TechnicalThe strong rally underway since early Mar. remains intact. Thereis another short term overbought in place now and the marketremains o-bought out through 13 weeks as well. The trajectory ofthe rally is now verging on unusually strong. The SP500 closedtoday at 945, and I would be happy if it was down somewherearound 865-885. So, I think it is nearing a point where it is overduefor a pull back, even though there are no indications yet ofdifficulties with trend. I have linked to a chart which features anintermediate term MACD and a 40 day RSI. Note that the RSI ismoving toward an intermediate term o-bought at 60%. CHART.

FundamentalAs readers know, I am on the hook for a cyclical bull market call.Now, it is normal for a cyclical advance in stocks to pre-date apositive turn in earnings (6.5 months on average). Still, the SP500is now running about 45% above very depressed 12 months net pershare. Granted that the 12 month figure contains one unprecedentedred ink quarter -- Dec. '08 -- when companies wrote off everythingthey could get away with, the 45% premium is a whopper -- largeby historic standards. In short, this baby is counting on the greenshoots to turn into stronger fibre soon. A pause in the upwardtrajectory of the market for a month or two would not bother me atall.